The Stochastic Mind: Information Rigidities and Household Economic Behavior

We investigate the influence of information rigidities on household expectations and economic decision-making. By extending the traditional sticky information framework and integrating insights from rational inattention theory, we introduce a dynamic measure of rational inattention that captures the time-varying nature of information processing constraints. Our findings demonstrate that higher levels of information rigidity are associated with increased forecasting errors, particularly in the underestimation of inflation. Comparing our dynamic inattention measure to traditional sticky information and fuzzy inattention models, we highlight the advantages of incorporating stochastic inattention to better understand household expectations and behaviour. Individuals with higher inattention levels tend to form more cautious or overly optimistic expectations about the macroeconomy and their personal spending, often disconnected from actual macroeconomic conditions. Additionally, we examine the impact of information rigidity on behavioural heuristics, revealing that higher inattention levels amplify cognitive biases, such as anchoring and availability bias. The influence of these biases varies significantly across countries and age groups, emphasizing the importance of tailoring communication strategies to specific population segments. Finally, we explore regional differences in how dynamic inattention affects labour market dynamics and proactivity. This study contributes to a deeper understanding of the behavioural dynamics of information processing and offers critical insights for policymakers and central banks in designing more effective communication strategies and macroeconomic policies.